This quote, from statistician George Box, is one of my favorites, because of its far reaching implications. It serves as a reminder to me that whether it’s a predictive model written in Python saved in a Jupyter notebook or a mental model based on personal experience and encoded in the wet-ware of my brain, it’s still wrong – in some way and to some degree that I may not be aware of or even able to discern.

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Things seem to be getting frothy in tech these days. Facebook paying nearly 1/10th it’s market cap for the WhatsApp user base sounds a lot like paying for “eyeballs” in the Dot-com era of the 1990’s. That acquisition was then quickly followed by the $2 billion Oculus announcement, which seems to be an even more awkward fit for the social network. Facebook is definitely playing the long game here.

The other news maker recently has been Disney’s acquisition of Maker Studios for nearly $1 billion. The fit between those two makes more obvious sense but the valuation still seems rich and has many around Silicon Beach scratching their heads. (UPDATE 4/14/2014: The plot only thickened when Relativity Media made a counter bid for Maker for an estimated $1.1 billion under a slightly different structure. This twist suggests a land grab for “new media” properties driven in part by fear of being shut out from all the good deals.)

The “follow the photos” theory for the WhatsApp purchase offered on PandoDaily (above link) sounds not only consistent with prior acquisitions (e.g. Instagram, a failed bid for Snapchat) but strategically sound as well. (UPDATE 4/28/14: Others have since echoed this theory as well.) An elegant explanation: co-opt the competition. Facebook can circumvent a disruptive threat by buying control now but letting the company continue to evolve separately. A simple solution to the classic innovator’s dilemma. A similarly consistent strategy and market view point probably lies behind Disney’s decision too.

Of course there are a great many other metrics to consider -measures of engagement like average view duration, likes, shares, and comments as well as demographics and devices, all of which can drive differences in the value derived from one subscriber or viewer to the next. One cannot simply impute a linear relationship between enterprise value and total subscribers. It would be analogous to looking at just the spot price today to estimate an options value, but there is no Black-Scholes model for new media start-ups.

Of course, some of the acquisition price still includes projected revenues. Trends such as market consolidation (a.k.a. all the recent acquisition activity), the growing popularity of brand integrations, a shift in ad dollars away from traditional television, and pressure building on YouTube to share more of ad revenues all add up to rosier financial projections, but for a start-up, those are just vanity metrics. (UPDATE 4/11/2014: As it turns out, Internet ad revenues have now overtaken broadcast.) They don’t account for the derivative value of what a company might learn from all the experimentation and audience engagement taking place on the YouTube platform.

Both Maker and AwesomenessTV have access to coveted customers segments – users that acquiring companies like Disney actually need to understand better to ensure their futures. They are paying for help figuring out where the market is going next so they can, “skate to the puck.” Next generation, digital-native media companies such as MCNs, unburdened by legacy operations, are uniquely positioned to provide that help.

Return on R&D is notoriously hard to estimate, and in an environment like this one, beware the winner’s curse. All that said, I get it. You can pay to play or risk being shut out – without the subscribers, the revenues or the future product/service pipeline.

After today’s Big Frame announcement, which seems like a sensible roll-up at just $15 million, I wonder who will be acquired next. (UPDATE 4/15/2014: Already DreamWorks Animation is rumored to be in talks with Vevo, in which YouTube also has a stake. Now that Relativity has lost out on Maker, surely that company will be looking for other deals. With Big Frame already out of play, one possibility would be going after a vertical like DanceOn or even looking outside of LA at something like Rooster Teeth in Austin or Diagonal View in the UK. I could see both of those latter two getting a reciprocal benefit from the connection back to the Media & Entertainment capital in California. The only thing that seems certain is Relativity will have to move fast because no one else seems to be slowing down.)

UPDATE 5/2/2014: Rumor has it that Relativity Media has decided to go after the most obvious next choice, one I considered but omitted above because I presumed to be too expensive. I ruled out Machinima almost immediately because Warner put money in that company just the prior month, but I should have at least mentioned Fullscreen. No deal has been reach, and if there’s truth in all the dramatic speculation in reports of a Relativity bid for Fullscreen, a deal may still be very unlikely. Nonetheless I wanted to update this post yet again because this latest development clearly demonstrates something at play in addition to financial considerations and even open innovation. My take is that Relativity sees the cost of acquiring Fullscreen for a loss (e.g. for an anticipated negative ROI) is less than the expected cost to its business of being shut out of any good MCN deals and slowly watching new media erode its business. The situation seems analogous to an airline that continues to operate unprofitably because of its fixed costs; old media companies like Relativity are better off staying in the game and making a bid than forfeiting altogether.

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Someone recently asked me the question, “What is [business] strategy?” Given that I call myself a “business strategy consultant,” I was disappointed to find myself fumbling around for an answer. I only managed to cobble together some vague metaphors involving “horizons” and “guiding lights.”

So what is strategy?

I should have a much clearer and more concise answer to this question, if for no other reason than to keep a better response at the ready for dinner parties when inevitably someone wants to know, “What do you do?”

When Porter came up with the Five Forces, strategy described at a high level how your company contended with these forces and beat the competition in the war for profits. The martial language is both intentional and appropriate since the concept of strategy originated in military theory.

But Porter’s Monitor Group is now defunct, acquired by Deloitte under duress. In an age when the pace of change from technological advancement is ever increasing, no competitive advantage is truly sustainable, and customers are better informed than ever about their available options. Simply aspiring to beat the competition will not suffice.

Firms need a more meaningful reason for being. Call it a mission, vision or something else, they need something with which both their customers and their employees can identify. That’s where strategy for the new era needs to begin – with the impact your company is trying to have on the world, above and beyond beating your competition.

Nonetheless, the Miltonian mandate to make money must also be heeded. Strategy doesn’t stop with impact alone (outside of the social sector). Rather, good strategy also identifies valuable problems to be solved and customers to be served who are willing to pay for that value.

Of course, competitors cannot be disregarded entirely in all this, but it makes no more sense to let your competitors drive your strategy than it does to drive your car looking in your rear view mirrors. You might glance in the rear view from time-to-time, but your gaze generally remains out front on the road ahead of you.

Shifting the focus away from competitors and over to impact and customers and their problems actually leads to a more robust and responsive strategy. Firms can better anticipate threats from disruptive new entrants and are more likely to recognize attractive opportunities in market adjacencies.

As I’ve considered my answer to the question, “what is strategy,” my conclusions have become more consequential than merely offering a new definition. The time has come to replace the notion of business strategy entirely. Music seems a more fitting analogy now than does war.

Imagine if we changed the conversation to be instead about winning business harmonies; rather than tactics, we discussed melodies; and in place of command and control hierarchies and processes, we empowered employees to improvise like jazz musicians.

What is business harmony then? The broad targeting of people (consumers) and problems in the market that in turn guides organizational decision making, coordinates disparate activities, and ensures a consonant impact from a collective effort.

In product development, after brainstorming (or ideating if you prefer) the next step is usually prototyping and concept selection. Picking up on my last post, once you have used the business model canvas to generate a few ideas about how you might leverage resources from the current business to launch a new one, how do you pick which design to go with? How do you prototype a business model? I’m pretty sure a 3-D printer won’t work for that.

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As noted in my previous post, part of what makes business model innovation fundamentally different at an established company (versus a traditional start-up) is the availability of resources from the existing business to help in launching the new one. I am not convinced, however, that most Fortune 500 companies have a well-developed understanding of how the resources in their possession might benefit a new venture.

“Uncertainty is when you’ve defined the variable but don’t know its value . . . But ambiguity is when you’re not even sure what the variables are. You don’t know how many dice are even being rolled or how many sides they have or which dice actually count for anything.”

– Dev Patnaik, cofounder and CEO of Jump Associates

The quote above comes from a recent Fast Company article on Gen Flux. While the distinction he draws between ambiguity and uncertainty may be somewhat arbitrary (and smack of a marketing sound bite, especially after a glance at the Jump web site), it is useful in exploring some of the fundamental challenges faced by companies in an environment of accelerating change.

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Planet Money on NPR is my new favorite podcast, and I loved the piece they did recently on the making of a summer hit. This is a model ripe for disruption if ever there was one. Like struggling newspaper and cable TV providers, the traditional business model of the music industry has been rendered untenable by digital technology and the interweb.

I wonder, then, why more musicians – or probably more fittingly more managers of musicians – do not treat album creation like a start-up business venture. Indeed, music industry critic (not to be mistaken with music critic) Bob Lefsetz often talks about how the music industry should do more to emulate the “best practices” of Silicon Valley start-ups (I question whether he actually has much more than a superficial appreciation for what it is to be a Valley start-up though).

Viewed through lens of disruptive innovation, indie bands looking to create an album can learn a lot from Clayton Christensen’s seminal Innovator’s Dilemma. Some of the parallels between a band and a start-up are obvious: the team, the time consumption, the failure rate, the drugs and sex (or was that only in The Social Network?). Here are a few other lessons that bands might take from insurgent entrepreneurs.

Value Proposition

In business, you value proposition is the reason someone should buy. It’s the problem you are solving or need you are filling and how you do it better than competing alternatives.

Music isn’t a zero sum game per se – listening to Adele does not necessarily prevent me from listening to GIVERS – so your value proposition isn’t so much about articulating to customers why they should listen to your music over others. It’s about self-knowledge and self-awareness (which is equally important in business by the way).

Your value proposition is your sound. What makes it unique. What makes it appealing.

The incumbents – the music industry establishment – sell a commodity product. They have a proven process, optimized to produce predictable hits, and resources well beyond your reach. So you have to differentiate and go after the periphery. Own the long tail.

Some will argue that you should make the music that moves you, not the music that you think will sell. Stay true to yourself and your art. I completely agree. I would call that sticking close to your core competency and the source of your competitive advantage.

What I am advocating is being more discerning in your target selection. The other necessary ingredient in any value proposition is the target customer. How can you know what problem you are solving or need you are filing if you don’t know who you are doing it for? Who are your listeners? Who are your fans?

True, Lady Gaga is more industry establishment than disruptive insurgent, but even big companies find a way to adopt entrepreneurial best practices from time to time. For most labels, the fan is an afterthought. They are trying to extract value from a mass market where the marginal individual is inconsequential. That’s why they are willing to sue individual fans for piracy.

My central point here is simple. Know who your fans are and evaluate every decision with some metric of value for your fans. Is this going to add value to how my fans experience my music or will it destroy value? Keep in mind that willingness to pay is an indicator of value creation. Charging for something is only detrimental to the fan if you are setting an unfair price under false pretenses (see predatory lending).

Seeking Funding

Apart from actually developing the product or service and winning customers, funding is the most important challenge a start-up must face. Frequently funding is a pre-requisite to finishing development and bringing the actual product or service to market. The good news for bands is that music production costs are not nearly as high and variable as they can be for a new business venture.

One option is to pursue funding along what I’ll call the venture capital route. That is looking for a label to sign you. Bands, like start-ups, need to find a label that fits their business. Not every VC firm invests in biotech; some prefer social media start-ups, others greentech. If you’re confident in your product, maybe you can try to get a meeting with the Kleiner Perkins of the music world, but you’ll probably need to show some revenues first (read: album and ticket sales).

I think there is a more compelling option though. Crowdfunding. This is no great revelation. Many artists are already doing it, and there are tools out there to make it easy(-ish). Kickstarter is one; I’m more partial to IndieGoGo (because I know the founders). We’ll call this the Little Angel route.

The primary point of contention when seeking funding is going to be equity. Equity equals control. You, the band, will invest primarily sweat equity into the venture (the album). The labels, well, bring money, but like any entrepreneur, you don’t want to give up too much control in exchange for their money. Don’t let them take advantage of your enthusiasm or excitement.

Big VC’s are going to look for more control, seats on the board so they can force your hand if ever they feel their investment might be at risk. Little Angels will require less – far less. Small VC’s will be somewhere in the middle, but you still need to offer them all an ROI. For Little Angels, it can be a collector’s vinyl print, free merchandise, early access to a local performance. Just remember, Little Angels are probably your most enthusiastic customers too so apply the same metric – is this going to add value to how my fans experience my music?

Of course, whatever the route, you’ve got to give people a taste of what they are investing in to convince them, unless you’re a veteran powerhouse team with a track record of hits (in which case labels will sign you, just like VC’s will invest in a team without a real product or service). This is where we meet the chicken and egg conundrum. How do I get investors for a demo if I need a demo to solicit investors?

Promotions

Promoting and distributing music is what has changed the most in recent years, upending the old model. Once a song has been recorded, it can be distributed at virtually no cost and, if you’re lucky, go viral. So how do you get that first song recorded? Boot strap, like any good entrepreneur. Find live gigs and perform to build a following. These are your alpha customers. Win enough to fund that first demo. It’s not easy but nothing worthwhile ever is, and don’t think for a minute that a successful start-up is any easier.

Got that demo recorded? Put it up on your website for FREE. Steve Blank advises to always make your customers pay, alpha, beta, whatever. I agree. Make them pay to come see you perform, but for now, this is a demo. It’s a promotional tool. Get it out there. Just protect it with a Creative Commons license. Get connected with streaming services like Rdio and the darling child of the moment Spotify and online radio stations like Pandora. Host a set on turntable.fm cross-promoting some of the bands that have influenced you. It will help build a brand your fans can identify with.

I’m a big fan of what Earbits is doing with Payola 2.0. Payola 1.0 was unethical because it wasn’t transparent; it was all behind closed doors and under the table. With Earbits, it’s more like advertising where the ads you are hearing are new music you might enjoy, not Summer’s Eve. The AdWords analogy is a good one. Sure bands are bidding to get heard, but if Earbits doesn’t serve up good, relevant music as well, no one will be listening. It aligns incentives.

(Side note: you do have a web site right? No need to break the bank. Create a Ning page where your fans can build a community around your music, start a blog or try about.me. Most importantly, look for something that can give you some analytics, e.g. number of visitors, average time on the site, etc. Remember that part about knowing your customer? Careful not to overextend yourself in this area though. Social media can be a distraction; you need to focus on your product – the music – and worry about the promotions a little later. Better yet, hire someone like me to worry about the promotions for you. You can reach me on my own about.me page. I’m only half joking. EDIT: Someone in the comments shared Onesheet with me. I agree, it seems like a better service than Ning because it’s tailored to musicians, but there are lots of “good enough” solutions.)

Next step, keep performing. And record your performances. An MTV style music video is expensive, but you can put together a quick montage from a show without spending too much. You can do it yourself with a desktop program, and if you don’t have a digital video camera, ask the fans at your show to send in video from their phones. Besides, MTV doesn’t even play music videos anymore. Here’s the best part. Throw it up on YouTube or Vimeo and post a link to your Ning page, create a YouTube Channel and link it to your about.me page, or imbed it in your blog (getting the idea?), and now your fans who were at the show can relive the experience and share it with their friends who weren’t there, potentially winning you more new customers. File that one under adding value to how your fans experience your music.

With any luck you’ll soon have an actual album. Reverse the model and release the singles for free, include the rest of the songs for purchasing the whole album. I don’t think you should have to put the entire album out for free (some do), but you should charge something more in line with what your fans are getting. $5.99 seems plenty for a 10-12 song album with 3 singles. EDIT: Here’s another tip, an idea I got from one of my favorite up-and-coming bands. Take that single and post the stems to Soundcloud, inviting anyone and everyone to create remixes, under a Creative Commons license of course.

The point isn’t to make album sales the primary way of monetizing your music. It just gets back to Steve Blank’s point; people appreciate more that which they pay for. Also, charging at least something for your album protects the value proposition of your online streaming partners. (Start thinking of them as partners in a music ecosystem, and everyone will benefit.)

At the end of the day, live performances are what it’s all about so time to tour. The truth is music is a service, not a product, which is why old guard companies still trying to wring returns out of distribution have it all wrong. The visceral experience you share with your fans can’t be duplicated. It’s the kind of scarcity people pay for. It happens one time and is preserved only in memories (and that montage you put online of course). That’s how you create an emotional connection to your customers and build brand loyalty. Even Coca-cola will envy you, which is exactly why corporate brands sponsor concerts and tours – the halo effect. Need to fund that tour? See funding above. As dynamic pricing takes off, early access to ticket sales may be another powerful incentive for Little Angels to chip in, and I think participating in your creative process in some way will be something fans will be willing to pay for.

There’s more to a business plan, financial projections from revenue streams like merchandising, licensing songs for commercial use, etc. But you’re the artist. You shouldn’t be worrying about that. Take care of the music. Let me worry about the rest for you.